Sec. Locke warns China becoming 'less welcoming'

TomBarkley

(Updates with details from report in paragraphs 15 through 18)

WASHINGTON -(MarketWatch)- U.S. Commerce Secretary Gary Locke warned Wednesday that China is backtracking on promises to make its economy more friendly to foreign companies, pointing to recent proposals to review and restrict investments in its economy.

Locke, tapped to be the next ambassador to China, leveled some of his harshest criticisms yet against his potential host country a week before high-level bilateral talks.

In prepared remarks for a forum planned later in the day on how to improve the U.S. investment climate for Chinese companies, Locke instead turned the focus on what he views as a more challenging environment for U.S. firms operating in China.

Ticking down a list of complaints about how China has failed to back up pledges to avoid discrimination, improve transparency, and tackle rampant counterfeiting, Locke said, "All of these recent moves by China result in its economy becoming less competitive and less welcoming to foreign direct investment."

If Congress confirms him as ambassador, Locke said he would continue to make opening up China's markets a "strong focus."

The Commerce Secretary's remarks at the Woodrow Wilson Center contrast with those of Treasury Secretary Timothy Geithner, who Tuesday focused more on the continued progress China has made in its currency and investment policies. Still, both sought to reassure China about its concerns about U.S. investment restrictions in the wake of spurned deals by Huawei Technologies Co. and other Chinese firms.

But while Geithner said the U.S. is willing to make further progress on those issues if China responds in kind, Locke made clear that there is no comparison between the openness of the world's two largest economies. There are "few" U.S. industries restricted to Chinese and other foreign investors, while U.S. firms in China are "frequently" shut out of sectors or forced to share technologies to gain access, he said.

"This imbalance of opportunity is a major barrier to continued improvement of the United States and China's commercial relationship," said Locke. "And it is part of a broader trend of China recently narrowing its commercial environment after a long and fruitful period of opening."

Locke's tone has also shifted since several months ago, when he sounded cautiously optimistic following pledges from Chinese officials in December and during President Hu Jintao's state visit the following month to address U.S. concerns about intellectual property rights and restrictive innovation policies.

Citing continued "exasperation" by U.S. business leaders trying to do business in China, he said in Wednesday's speech that "the fundamental problem often boils down to the distance between the promises of China's government and action."

The biggest challenge continues to come from China's efforts to support "indigenous innovation," he said. Despite China's agreement during the December trade talks to lift restrictions against U.S. firms in its foreign investment catalog, a newly released draft of those rules covering investments in different sectors "falls far short of that promise," said Locke.

In addition, China's new system to review foreign investments is based on "vague" national security parameters and includes a "potentially abusive" policy allowing competitors to propose a review, he said.

Locke said it's better to choose "cooperation over confrontation" to resolve economic tensions, making next week's Strategic and Economic Dialogue between the U.S. and China all the more important. But while stressing that the Obama administration understands that China faces a difficult road to reform, he said more progress is needed.

He also made clear that the U.S. is willing to use "use every legal tool at our disposal to ensure that China makes good on its commitments," including by following through on the market-opening policies it agreed to when it joined the World Trade Organization in 2001.

The report released later Wednesday found that Chinese foreign direct investment into the U.S. more than doubled last year to more than $5 billion, but remains just a fraction of the more than $2 trillion in overall stock of foreign direct investment in the U.S.

Authors Daniel Rosen and Thilo Hanemann, economists at the Rhodium Group, said the U.S. must become more pro-active to capture more of China's global direct investment flows that are expected to top $1 trillion by 2020.

While the U.S. national security review process is fair, greater transparency is needed to protect it from politicization, the authors say.

They also urged the White House and Congress to send a strong bipartisan statement that Chinese investment is welcome, while refraining from suggesting any reciprocity in investment decisions.

But the report also pointed to China's responsibility to improve corporate governance and create a clearer separation between firms and the state.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.